Mostly unseen in the United States, Chinese music streaming company Tencent Music Entertainment continued to prove it’s a formidable force by improving revenues 34% to $3.65 billion (25.43 billion Renminbi) in 2019. Net income jumped 126.7% to $664 million.
The worst weeks of the novel coronavirus in China came after the fourth quarter and full-year reporting period for the results announced Monday (March 16), but the global pandemic still loomed over an earnings call. “I wish you and your family good health,” said Cussion Pang, Tencent Music’s CEO, at the call’s conclusion. “The virus has brought some negative impact to our society and even the global economy. I’m sure that all the bad times are gone and the future is bright.”
Unsurprisingly, Tencent Music executives said little about the virus’ effect in the first quarter, instead focusing on the impressive financial and operational successes in 2019. Pang first addressed China’s struggle by noting Tencent helped “thousands” of artists with a musician program gave away a free, seven-day membership for online music and karaoke services for people “to express their thoughts and good wishes to one another.” Later, Tony Yip, the chief strategy officer, said the revenue growth would be “softer” than original expectations but would accelerate in the second half of the year.”
Tencent Music, a collection of four streaming platforms in China, generates far more revenue selling virtual goods than subscriptions to music. It’s a business model with enviable margins: Tencent Music’s gross margin was $1.25 billion, or 34.1% of revenue — far better than the 25-30% seen at other streaming companies.
Tencent Music served 644 million listeners at the end of 2019, second only to YouTube and 373 million more than Spotify. Between the four platforms — QQ Music, Kugou, Kuwo and WeSing — end-of-year paying subscribers numbered 39.9 million, a 47.8% increase from 2018, but well behind Spotify’s 124 million and Apple Music’s 60 million.
The differences in Chinese and Western markets further stand out in growth strategies and bringing new formats to the platform. Tencent Music is pushing long-form audio such as audiobooks, said to be “an under-penetrated market,” through a licensing deal with China Literature. In the West, namely with Spotify, the audiobook market has been ceded to hyper-focused platforms such as Amazon’s Audible.com. Instead, Western music services, led by Spotify and iHeartMedia, have heavily invested in podcasts.
At the same time, Tencent Music has introduced short-form video of both user generated content and original programming such as the Mr. Radio variety show. Next quarter, QQ music will launch live-streaming, already used for events dedicated to new release music.
The starkest contract between Tencent Music and Western subscription services is the average revenue per user each month. When each subscriber pays roughly the same, depending on plan, ARPU describes a service’s ability to maximize revenue while nabbing more, decreasingly valuable customers. In North America and Western Europe, a $5-$6 ARPU is common. In China, Tencent Music got $1.33 for each paying user — and $19.80 for social entertainment like karaoke and virtual gifts, underscoring that digital music is an emerging market with massive potential but now valuable primarily for its population.